Iceland keeps rate steady, still sees need for tight stance

June 13, 2018

By CentralBankNews.info
      Iceland’s central bank left its benchmark rate on 7-day term deposits at 4.25 percent and reiterated its recent guidance that it expects the positive output gap to narrow but “a tight monetary stance is still needed in light of rapid demand growth and underlying pressures in the labour market.”
      The Central Bank of Iceland (CBI), which has maintained its rate since a cut in October 2017, said economic growth in the first quarter of this year was slightly higher than expected but overall developments were largely in line with its May projections and growth is still expected to ease this year on weaker exports and less rapid rise in domestic demand.
      Iceland’s Gross Domestic Product expanded by an annual 5.4 percent in the first quarter of this year, up from 1.5 percent in the fourth quarter of last year.
      In May the CBI raised its GDP growth forecast for this year to 3.3 percent from a previous 3.2 percent, and down from 3.6 percent in 2017. For 2019 the CBI forecast 3.0 percent growth.
      Inflation eased to 2.0 percent in May from 2.3 percent in April as the past rise in house prices continues to ease and the impact of past rises in the krona’s exchange rate have diminished, trends the CBI expect to continue in the near term.
      “On the whole, inflation expectations appear consistent with the target,” said CBI, which targets inflation of 2.5 percent.
      In May the CBI forecast consumer price inflation this year of 2.6 percent, up from 1.8 percent last year, and 2.6 percent in 2019.

     
     The Central Bank of Iceland issued the following statement:

“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 4.25%.
According to the preliminary national accounts figures recently published by Statistics Iceland, GDP growth measured 6.6% in Q1/2018, well above the growth rate in H2/2017. Although this is slightly higher than the Central Bank projected in May, overall developments are in line with the Bank’s forecast. GDP growth is still expected to ease this year, with weaker export growth and a less rapid increase in domestic demand. Developments in house prices and indicators from the labour market point in the same direction.
Inflation fell to 2% in May, but in recent months both headline and underlying inflation have been close to the Bank’s 2½% inflation target. The year-on-year rise in house prices continues to ease, and the opposing effects of previous appreciation of the króna have diminished. This trend will probably continue in the near term. The króna has depreciated slightly since the last MPC meeting, but the foreign exchange market has remained well balanced. On the whole, inflation expectations appear consistent with the target.
The outlook is for the positive output gap to narrow. Nevertheless, a tight monetary stance is still needed in light of rapid demand growth and underlying pressures in the labour market.”
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